Connecticut revenue miss leads to budget scramble

NEW YORK Fri May 2, 2014 5:40pm EDT

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NEW YORK May 2 (Reuters) - Connecticut lawmakers scrambled to rework the state budget on Friday after revenue projections fell well below expectations, all but eroding a forecast surplus and scuppering plans to boost the state's depleted rainy day fund, beef up the underfunded pension system, and provide tax rebates.

News of the revenue shortfall on Thursday, which was mainly due to lower than forecast income tax collections in April, was a setback for a state that has lagged the recovery after the financial crisis and struggled to put its fiscal house in order.

State lawmakers agreed a new $19 billion spending plan for the 2014-15 fiscal year on Friday that strips out $40 million from the previously enacted 2015 budget and keeps spending growth at 2.3 percent, governor Dannel Malloy said. State lawmakers are still working out the details of the plan and are expected to vote on it in the coming days.

"Like any legislative session, this one wasn't without its surprises and challenges," said Malloy in a statement. "But the bottom line is that this budget is balanced, puts the surplus into the rainy day fund and makes real, necessary investments in the future of Connecticut families."

The new spending plan modestly boosts the state's rainy day fund by $40 million, or 1.8 percent, to $314.1 million. Connecticut depleted its rain day fund in 2010 and 2011 to offset the effects of the recession.

Income tax revenues have fallen below forecasts in many states due to expected changes to tax rules last year that pulled tax revenue into 2012, but Connecticut's issues run deeper. Connecticut's economy may have grown at around just 1 percent in 2013, below the national rate of 1.9 percent, and well below the state's own forecast of 2.5 percent.

"The big miss was to an extent on the economy," said Michael Dolega, an economist at TD Economics, who forecasts growth of 1.25 percent for the state last year. "There will be an acceleration but what is happening on the ground is not very encouraging at this point."

The state is heavily exposed to the financial sector and has defense and aerospace industries that rely on federal orders and exports to Europe, both of which have suffered from spending cuts.

Malloy proposed in January to use the surplus in the state's budget - then projected to be $505 million - to boost the rainy day fund by $250 million and pay $100 million into the depleted state pension fund, which is one of the worst funded in the nation with assets worth only 42 percent of obligations.

"It would have been very beneficial for the state to be able to put in what it had expected to put in a few months ago or a few weeks ago even," said Douglas Offerman, an analyst at Fitch Rating. Fitch rates Connecticut double A with a negative outlook and has said it may downgrade the state if it cannot meet budget forecasts.

Connecticut borrowing costs are among the highest of any state. The state pays over a quarter of a percentage point more than the highest rated states to borrow money for 10 years. (Reporting by Edward Krudy; Editing by Chizu Nomiyama)

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